RECALL No11 Mature Markets
Attacker mindset: Making IPTV a residential success
04 Attacker mindset: Making IPTV
a residential success
Most incumbents have made TV a fundamental part of
their strategies; but so far, few have met with IPTV suc-
cess. An attacker mindset can prove to be the missing
piece in the multi-play puzzle.
The convergence of media and telecoms is reshaping
wireline operators. This is one reason most incumbents
in Western Europe have made IPTV (Internet protocol
television) a key element in their growth plans. But
so far, most of these plans have met with only limited
success. Typical explanations like multifaceted com-
petition and difficult pay-TV market conditions across
Europe only explain part of the shortfall.
Both consumer demand for bundled offers (which can
account for up to 80 percent of sales when available)
and technology itself drive convergence. Today, multiple
access technologies allow for the full range of triple-
play products (voice, broadband, and television). Given
this context, access competition will likely persuade
European households to choose single-access provid-
ers. Even in markets with limited interest in basic pay-
TV such as Germany, a television offer remains a key
factor when consumers select a multi-play provider.
While this development poses a significant threat to
incumbent operators, it does not have to knock them
out of the game altogether.
The incumbents opportunity
Capturing the IPTV opportunity is not easy, as the
pay-TV business itself is under significant pressure.
McKinsey research shows that increased availability of
free-to-air TV e.g., through aggressive DTT (digital
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terrestrial television) rollout in multiple countries
and competition for pay-TV are driving TV services
commoditization, resulting in falling prices and declin-
ing consumer willingness to pay. For example, in two
European markets the prices for DTH (direct-to-home)
entry TV offers dropped between 30 and 35 percent
from 2007 to 2008. Although interest in and willing-
ness to pay for basic and premium TV offers are either
flat or declining in key markets across Europe, consum-
ers are showing increased interest in new features such
as HDTV, shift TV (live pausing), and personal video
recording. In this context, IPTVs high interactivity
potential puts incumbents in a very strong position to
reinvent pay-TV business and capture a large share of it.
To this end, telcos have set out on a number of differ-
ent paths when rolling out IPTV, depending on market
conditions (Exhibit 1). In some markets, the threat to
a wireline incumbents telecoms business from other
TV service providers is high and commoditization of
pay-TV is still low. There, TV has become a key business
for telecoms incumbents on par with other components
of the triple-play bundle. In the reverse situation (i.e.,
high-commoditization, low-threat markets), TV is still
relatively marginal and seen more as an up-selling tool
to lock in customers and generate extra value.
Act like an attacker
Successful incumbents in the more competitive mar-
kets often assume attacker-like mindsets and focus on
making TV a core element of the residential segment
business. One European incumbent faced significant
challenges as 2007 drew to a close, with growing compe-
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01 Wireline incumbents have started to offer TV in very different

Wireline incumbents have started to offer TV in very different
marketenvironments
market environments
High (%) Penetration of TV
TV as a defensive strategy TV as a clear life-or-death factor
clients in ADSL base,
Belgacom (56%) 2Q 2009
British Telecom
Maturity of 3P (9%)
Portugal
alternatives France Telecom Telecom (57%)
in market (27%)
(i.e., incumbents
exposure to an Telefnica (11%)
aggressive 3P offer)
TV primarily as an up-selling tool TV as a possible adjacent business
Cable 3P pen-
etration
Consolidated 3P Deutsche Telekom
attackers (n/a)
Telecom Italia (6%)

esk Telecom TeliaSonera (31%)

Low (n/a)

Low High

Current value of pay-TV in the 3P market

Number of available free-TV channels
Penetration of pay-TV

SOURCE: Screendigest; Ovum; ITU; operators Web sites; press clippings; interviews; McKinsey

tition, falling fixed-line voice revenues, and plateauing
wireline broadband growth. In response, the incumbent
launched a multi-platform television strategy under a
separate brand with the goal of achieving TV market
leadership. Offering both IPTV and DTH nationwide,
the operator leveraged the functionalities of IPTV to
differentiate its offer and reinvent the pay-TV concept.
Resulting from this strategy, the operator enjoyed
growth levels that significantly exceeded expectations,
achieving double-digit household penetration in less
than one year. Equally important, over 50 percent of
IPTV customers are new to the incumbent. The new
brand has also underpinned the recovery of the incum-
bents flagging broadband business, propelling it to first
place in the market in terms of net broadband subscrib-
er additions. By launching its new pay-TV brand based
on tactics and techniques borrowed from the attackers
playbook, the incumbent reversed the seemingly inevi-
table decline of its wireline business.
Markets are diverse and the role of IPTV can differ sig-
nificantly. Incumbents who want to use pay-TV offers
to revitalize their wireline broadband businesses can
learn from operators who assume six aggressive pos-
tures toward this business. They act like true attackers
in pay-TV and in the process, they rethink several ele-
ments of their residential segment business models.
Seek scale and focus on new customer acquisitions.
Incumbents need to adopt an attackers stance in rolling
out pay-TV in order to capture the significant economies
of scale (within capex and ROI limits) that characterize
IPTV economics. The underlying drivers are platform,
network, content, and marketing costs. Beyond this
and on par with scale, the percentage of subscribers
acquired from outside an operators customer base is
one of the most important key performance indicators
for a successful IPTV rollout. The higher this percent-
age, the better. When incumbents acquire a triple-play
customer from outside the base they gain the full incre-
mental triple-play average revenue per user (ARPU).
This amount can be several times greater than the
income from upgrading a broadband customer to IPTV.
While individual markets differ, research shows that
all operators can benefit from aggressive penetration
strategies that reach beyond their current customer
bases. In situations where an incumbent faces limited
competition, IPTV provides up-selling opportunities
for broadband and new acquisitions in the mobile-only
young segment. In markets where incumbents have
lost significant broadband share, IPTV enables them to
assume attacker-like approaches to win back customers.
Choose optimal technology and footprint. Given the
bandwidth limits of copper loops in current networks,
RECALL No11 Mature Markets
Attacker mindset: Making IPTV a residential success
leading telcos in the TV realm increasingly rely on
multi-platform technology strategies to ensure suf-
ficient service reach. To handle two IPTV streams in
standard definition plus a 1 megabit per second (Mbps)
minimum Internet connection, for example, a network
requires 8 Mbps of bandwidth. Currently, this level
is available in just over 40 percent of copper loops.
To overcome this copper constraint, multi-platform
strategies that mix copper with FTTH (fiber to the
home), DTH, and DTT have become viable ways to
deliver the core digital TV value proposition. Solutions
like this focus on technological neutrality to facilitate
communication. However, telcos do need to under-
stand the acquisition economics behind each technol-
ogy in order to design a workable multi-platform strat-
egy. Such a strategy would employ an optimal mix of
technologies to generate the maximum profit and high-
est penetration levels, while minimizing SACs (service
admission controls).
Given the variety of possible platforms and business
models from which incumbents can choose, they often
come up with very different multi-platform strate-
gies. For example, one European telco focused almost
entirely on low-priced digital TV (through DTT) and
positioned IPTV service as a complement to broadband
services. Another concentrated its efforts on IPTV via
ADSL2+ service in urban areas and used satellite TV for
other regions. Both players achieved high pay-TV pen-
etration levels with very different business models.
Create a zero-base offer structure. Conducting a zero-
base redesign of all single-, double-, and triple-play
offers can result in a simple, easy-to-understand offer
structure. This optimizes the economics of the full resi-
dential segment portfolio and increases sales channel
performance. To achieve this, telcos need to take new
consumer-driven approaches to product development
and portfolio management when optimizing multi-
platform plays. Incumbents should emulate attackers,
proactively cannibalizing traditional business with new
models, setting their sights on acquiring new customers
(not just retaining current ones), and working to sustain
overall per-customer profitability by actively managing
subscriber acquisition costs and network expenses.
Managers intent on developing a great product design
should focus on three principles:
First, they need a deep understanding of key consum-
er buying factors, one driven by the value different
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consumer segments attribute to each product feature.
Understanding components like the number of TV
channels, availability of premium content, broadband
speed, voice bundles, and HDTV features is a key
prerequisite when developing powerful, but simple,
triple-play bundles.
Second, operators should take a holistic, portfolio-
based approach to designing offers. Incumbents fre-
quently see IPTV as just another add-on to their offer.
To the contrary, McKinsey research shows that the TV
factor ranks high in a consumers decision on which
provider to choose. Only by using a pure zero-base
approach can operators maximize customer acquisi-
tion outside the existing base and fully optimize their
entire portfolio profitability.
Finally, they should strive for a deeply analytical and
fact-based process, combining consumer preferences
with full economic modeling and simulation. This
approach is required to model the economic ben-
efits from attracting new customers versus the pos-
sible cannibalization of the current business. When
designing a triple-play offer to go along with its new
fiber rollout, for example, one incumbent modeled
several portfolio structures until it reached a struc-
ture that allowed for a 20 percent jump in potential
revenues and 8 percent greater profitability in the
entire residential segment.
Only when armed with deep consumer understanding
and the capabilities to fully model the impact of dif-
ferent zero-base portfolio structures can incumbents
design simple but powerful product portfolios. The
power lies in covering all market needs, while driving
growth and profitability without introducing complex-
ity into their systems.
Develop a push go-to-market strategy. One clear hur-
dle many IPTV players struggle to overcome involves
raising awareness of their pay-TV product on a broad
scale. In one market, research into consumer purchas-
ing patterns showed that the two biggest hurdles at
the launch of an IPTV program are a lack of consumer
awareness that pay-TV is available and getting shoppers
to move from considering IPTV to actually purchas-
ing it. Two years after the launch, the main stumbling
block still involves moving potential customers from
awareness to familiarity. Since the value proposition of
IPTV is based on reinventing the TV business, a lack
of consumer familiarity with product features is, of
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course, a major barrier to success. To overcome this, one
incumbent adopted an aggressive consumer education
campaign that used both above-the-line (e.g., broad-
cast television, newspapers, radio) and below-the-line
media (e.g., Internet, direct mail). By combining a mas-
sive above-the-line IPTV launch and a viral marketing
campaign on the Internet, the telco turned its brand into
one of the best recognized in the market.
In parallel with aggressive communication, successful
attacker-like strategies need a strong focus on direct
distribution. This means using multiple overlapping
channels in each region to reinforce the message cou-
pled with an aggressive posture toward attracting new
customers from outside the base. Such an approach can
involve intensely leveraging shops and a door-to-door
sales force (a must to achieve anything near 50 percent
of sales from outside the existing customer base).
Finally, telcos should use a proactive push model with
newly acquired IPTV customers to up-sell content pack-
ages and video on demand. Combined, these can con-
tribute up to 40 percent of television ARPU.
Implement a new home networking operating model.
Highly upgraded home installation and networking
capabilities are essential for incumbents to handle the
complexity of new TV technologies. In order to deliver
high-quality service, telcos will need to interlink sales,
field installation and maintenance, customer care, and
equipment purchasing into one seamless end-to-end
process. Accomplishing this will require a strong sales
force, a highly skilled technical staff focused on qual-
ity of service, call centers capable of resolving issues
the first time every time, and significant investments
Armando Cabral
is a Principal in McKinseys Lisbon office.
armando_cabral@mckinsey.com
Miguel Fonseca
is an Associate Principal in McKinseys
Lisbon office.
miguel_fonseca@mckinsey.com
in customer premise equipment (CPE). In fact, telcos
should consider CPE purchasing a strategic function
placing strong emphasis on both reliability and on
driving costs down.
Focus the organization on TV. All in all, the complexity
of the required change forces incumbents to place an
unequivocal organizational focus on the success of the
TV rollout. This implies that senior managers (ideally
the CEO) take on TV as their key responsibility; in the
process, allocating the best resources in the residential
organization to this business. Usually, IPTV rollout
starts with a team (or unit) responsible for the initial
product design and delivery. To ensure process success,
however, operators need to move beyond this structure.
Triple-play offers require holistic bundling strategies of
voice, broadband, and TV backed by new sales chan-
nels and go-to-market models, and a full revamp of
installation, maintenance, and customer care process-
es. Thus, the entire organization will need to change in
order to successfully deliver the new value proposition.
IPTV should become a core element in the DNA of all
marketing, sales, and operating units that deal with the
residential segment. This means full IPTV transforma-
tion of the wireline business model.
***
IPTV holds promise that has yet to materialize for the
large majority of wireline incumbents. In some of the
most competitive markets, incumbents are assuming
an aggressive attacker-like mindset. As experience in
those markets shows: if incumbents are able to act deci-
sively on all the levers described here, IPTV can become
a major element in a profitable growth strategy.
Patricia Ferruz
is an Associate Principal in McKinseys
Madrid office.
patricia_ferruz@mckinsey.com
Sergio Osle
is an Associate Principal in McKinseys
Madrid office.
sergio_osle@mckinsey.com